Yum China Holdings Inc (YUMC, Financial) recently experienced a daily gain of 5.57%, despite a 3-month loss of -5.21%. With an Earnings Per Share (EPS) (EPS) of 1.77, the question arises: is the stock modestly undervalued? In this article, we delve into the valuation analysis of Yum China Holdings (YUMC) to provide a comprehensive insight into its intrinsic worth.
Company Overview
With nearly 13,000 units and $10 billion in systemwide sales in 2022, Yum China Holdings Inc (YUMC, Financial) stands as the largest restaurant chain in China. The company generates revenue through its own restaurants and franchise fees. Its key concepts include KFC and Pizza Hut, but its portfolio also encompasses other brands such as Little Sheep, East Dawning, Taco Bell, Huang Ji Huang, COFFii & Joy, and Lavazza. The company's current stock price is $56.14, while its GF Value stands at $65.76, indicating a potential undervaluation.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic worth, derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus' valuation method, Yum China Holdings appears to be modestly undervalued. This means that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Before investing, it's critical to assess a company's financial strength. Companies with poor financial strength pose a higher risk of permanent loss. Yum China Holdings' cash-to-debt ratio of 1.33 outperforms 79.77% of 351 companies in the Restaurants industry, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent long-term profitability, is less risky. Yum China Holdings has been profitable for 9 of the past 10 years, with an operating margin of 10.25%, ranking better than 80.29% of 350 companies in the Restaurants industry. However, its growth ranks worse than 61.29% of 279 companies in the Restaurants industry, with an average annual revenue growth of -0.2% and a 3-year average EBITDA growth of -3.8%.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) is another way to assess its profitability. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Yum China Holdings' ROIC is 8.71, and its cost of capital is 5.5.
Conclusion
All factors considered, Yum China Holdings' stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks worse than 61.29% of 279 companies in the Restaurants industry. To learn more about Yum China Holdings stock, you can check out its 30-Year Financials here.
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